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Month: December 2011

Last Friday David Cameron, the Prime Minister, gave a speech on the 400th anniversary of the King James Bible, which got a sprinkling of coverage in the weekend press. In it he sought the help of Christianity and church leaders in helping to restore the country’s lost moral values, as evidenced by the summer riots, and Banking and MP’s expenses scandals.

My point isn’t to criticise this speech – I just don’t know where to begin – but to ask what such a speech says about modern politics. In terms of intellectual rigour it wasn’t even trying. But many people, and especially those of conservative instinct, will agree with its sentiments. A nostalgia for higher moral values in the past; linking the country’s identity to the Christian faith; the feeling that s stronger standing of religious faith amongst other people will improve the country’s way of life. The speech was no attempt to lead public opinion; it was following it. Some commentators pointed out the political conventional wisdom against “doing God” – but this was not doing God, it was doing a warm fuzzy glow around the idea of religious faith and moral values. As such it has not damaged Mr Cameron’s standing.

Such lack of acuity in a senior political leader is something relatively new in Britain, I think. It brings to mind Roy Jenkins’s remark about Tony Blair, in many way Mr Cameron’s role model, that he was “not a First Class intellect”. Very clever, but I bit fuzzy. It is impossible to imagine William Gladstone producing a speech like this one, or Margaret Thatcher, come to that.

This is a matter for regret. Surely our political leadership should aspire to, well, leadership? – and try seriously to argue their cause and persuade the country about their vision for the way forward. Even people who do not agree might see the force of the logic. Instead we get a few half-baked ideas designed appeal to supporters’ prejudices.

And as for improving the standards of behaviour on our estates and boardrooms alike, this is just hot air. Bad behaviour in these places, or their ancient equivalents, is absolutely nothing new, and does not correlate to a lack of religious standards – it has been known to permeate religious establishments. And high moral standards have been the excuse for the infliction of much cruelty and injustice (think of the treatment that used to be meted out to unmarried mothers) in a way that, ironically, contradicts what Jesus Christ himself taught. Religions don’t offer clear moral guidance, they offer a menu from which adherents pick and choose, and then claim the authority of heaven (think of the 9/11 bombers, West Bank settlers, Apartheid Boars, and so on).

Behaviour is a real enough problem. But our Prime Minister just leads a national whinge. He should aspire to more.

Nearly 200 years ago, in September 1812, Napoleon reached the maximum limit of his nominal power when he entered Moscow with his army drawn from right across Europe. His empire covered France, Germany, Poland, Italy, much of Spain (his lieutenants were in the process of driving back an advance by Anglo-Spanish forces that had temporarily liberated Madrid) and now much of Russia, including its Asiatic capital. But he could not hold it; by the year’s end he had been forced to abandon Russia altogether, his army destroyed, and he was completely crushed within a year and a half. For the Russians 1812 had proved a time of incessant retreat, as they avoided battle until just before Moscow (at Borodino), where they lost and were forced to abandon Moscow without a fight, but ultimately a year of triumph.

Is this a fair metaphor for the British Eurosceptics in their moment of victory at the British veto at last week’s EU summit? Certainly their triumphalism is unbearable. Bill Cash was described by one of our outraged local Lib Dem members as “the cat that got the cream.” This follows one long process of retreat by British Europhiles as they conceded the political initiative to the sceptics, practically without a fight, time and again.

But the initial reaction of leading Lib Dems was strangely sanguine. Nick Clegg was initially quite supportive of David Cameron. On Friday night the deputy parliamentary leader, Simon Hughes, painted a positive picture to party members at a social event which I was attending. Mr Clegg has changed his tune today, of course. Whether that is because of the sceptics’ reaction, or because further details of what actually happened at the summit have emerged (for a flavour of this read the Economist’s Bagehot blog) I cannot say.

But the initial relief at the summit result shown by Mr Hughes has some logic behind it. A treaty would have required ratification by the UK parliament, and demand for a referendum. This sort of battle plays to the sceptics’ strengths – strong support by the press and a widespread wariness of extra EU power. A referendum on a treaty change is the battle the europhiles least want to fight. The sceptics can deploy a “have your cake and eat it” argument for a no vote – a vote not against the Union as such, but to protest against “Brussels”. There will be no such battles now. If there is a referendum it will be about whether we stay in the EU at all.

Instead the sceptics’ position might start to come under the sort of scrutiny that it has hitherto lacked, and be shown to be no more tenable than Napoleon’s hold on Moscow. The summit has started that exposure process. The sceptics’ armchair negotiators have said that we can use the British veto to negotiate major concessions, the “repatriation of powers”; but Mr Cameron proved unable to do this. It has also been said that we were not isolated in the EU, and we could lead a gang of pro-market non-Euro members. This against has been shown to be a hollow idea, as Germany has greater influence over these potential allies than we do. Indeed a horrible spectre emerges, that the British blocking tactics make many of the EU’s institutions irrelevant while the other countries set up alternatives over which the British have no say. The sceptics often complain about Britain shackling its fortunes to a corpse – but the corpse could be the official EU structures, rather than the European project itself…and that would be an outcome entirely of our own making.

And further eurosceptic fantasies will soon be exposed. Their aim is to set up some sort of free-rider relationship to the Union, where British products enjoy free access without to European markets without our businesses having to comply with those pesky social regulations. Some think the country can do this within the EU, using opt-outs, others that it can be done outside it, in the European Economic area (like Norway, Iceland and Switzerland). But this requires the other 26 countries to agree with it. All of them. Why should they?

Just as the Eurozone optimists are having their ideas tested to destruction in a gruelling series of financial crises, so the eurosceptics might find themselves on the wrong side of the argument. In both cases it is clear that the only tolerable escape route involves further European integration, not less. Perhaps, like Napoleon’s collapse in 1812, it will happen quicker than we think.

The top story on the BBC Today programme this morning was about the expansion of so called “payday loans”, drawing attention to the shockingly high interest rates such loans entail (1,700% APR is typical). This was hooked onto some research by insolvency group R3, which thereby got massive free publicity (Christmas came early for some PR person); the BBC web story is here. Even the sober Financial Times runs the headline “‘Legal loan sharks’ target urban poor“. This coverage makes me very uncomfortable. Time and again middle-class do-gooders and commentators fail to understand the grim economics of being poor – and their interventions usually make things worse.

What are payday loans? They are short-term loans (less than a month) for smallish amounts (typically £100s). The timing and amount is related to typical paydays, hence the name. Looking at moneysupermarket.com the typical charge is £25 for a one month loan of £100. They are provided by in a reasonably transparent way by public companies, rather than in the informal economy.

How to think about this? When providing financial products (similar logic applies to savings savings) it is easiest to think about three components. The cost of the money; the risk of default; and the labour input. The first two are well understood by everybody, and are directly proportional to the amount and length of time borrowed or saved, and can be understood as a rate of interest. The third is usually ignored, because if your are well-off it doesn’t amount to very much in the scheme of things. Labour input is the cost of actually providing the product (including distribution, admin, computers, and the rest); it is not proportionate to the value of the product, but to its structure, the number of transactions, and so on. If you are dealing in millions of pounds it is negligible; but if you are borrowing (or saving) the odd £100 it is not. £25 is a massive rate of interest for a £100 borrowing, but a run of the mill cost of labour input for a single transaction. If you don’t have much money labour input is highly significant; it destroys your savings and ratchets up the cost of borrowing.

If the loan is genuinely short-term then it doesn’t look unreasonable, in fact. What are the alternatives? An unauthorised overdraft at your bank will cost way more than this, since British Banks have lighted on this as a way of cross-subsidising “free” banking. And forget trying to get an authorised overdraft, which might well come with an arrangement fee, etc. And it is a much better deal than the real loan sharks in the informal economy. Credit cards (if you can get one) may be a better deal if you are careful. In fact you could look at payday loans as welcome competition in the lending market.

Much of the criticism of this type of product centres on people who use this type of finance for longer term needs, rolling over each month. This is a very bad idea and leads to even worse hardship, but is really right to ban this sort of product on the basis that it can be misused? Cars kill hundreds (even thousands) of people each year, but this doesn’t mean we stop the public from driving them. Much of the criticism is unbearably patronising.

There are two things we must learn from this. First is that finance for the poor is more about transaction costs than interest rates and rates of return. Longer term borrowing can be extortionately expensive; savings, including most pension plans, deliver much lower returns than those for better off people. It’s part of the poverty trap that is not widely recognised. And it’s one of the reasons why the welfare state is so important in developed societies.

And the second thing is that it is vital for everybody, and especially those on lower incomes, to understand finance much better. School teaching on “financial capability” is essential. Everybody needs to be numerate.

But well-meaning regulation, such as that which has pursued payday lenders in the United States, is a likely to make matters worse. You can’t legislate away the laws of physics.